Westpac Says The Fed May Lift Rates Faster And Higher Than Markets Currently Expect

From Business Insider.

Now here’s an interesting paragraph from the minutes of the US Federal Reserve’s January FOMC meeting released on Wednesday.

Many participants noted that financial conditions had eased significantly over the intermeeting period; these participants generally viewed the economic effects of the decline in the dollar and the rise in equity prices as more than offsetting the effects of the increase in nominal Treasury yields.

So we know the question you’re asking — what are “financial conditions” and why is this interesting?

According to the St Louis Fed, financial conditions indices “summarise different financial indicators and, because they measure financial stress, can serve as a barometer of the health of financial markets”.

Using short and long-term bond yields, credit spreads, the value of the US dollar and stock market valuations, it attempts to measure the degree of stress in financial markets.

What the minutes conveyed in January was despite a lift in longer-dated bond yields, strength in stocks and decline in the US dollar suggest that financial conditions still improved.

So why is that important?

According to Elliot Clarke, economist at Westpac, it suggests the Fed may need to hike rates more aggressively than markets currently anticipate.

“That financial conditions have eased at a time when the FOMC is tightening policy will grant confidence that downside risks associated with further gradual rate increases and quantitative tightening are negligible,” he says.

“More to the point, this implies that risks to the FOMC rate view, and Westpac’s, are arguably to the upside.”

Adding to those risks, and even with the correction in US stocks seen after the January FOMC meeting was held, Elliot says in February “we have seen a further significant increase in government spending and signs of stronger wages”.

He also says the stronger-than-expected consumer price inflation in January — also released after the FOMC meeting was held — “will have also given the FOMC greater cause for confidence that inflation disappointment is behind them and that the risks are instead skewed to inflation at or moderately above target”.

As such, Elliot says the tone of the January minutes points to gradual rate rises from the Fed, mirroring what was seen last year.

However, the risk to this view, he says, is for more and faster hikes in the years ahead.

“In these circumstances, a continued ‘gradual’ increase in the fed funds rate through 2018 and 2019 — implying five hikes in total — is still the best base case,” he says.

“However, a careful eye will need to remain on financial conditions.

“Should they continue to move in the opposite direction to policy, a more concerted effort by the FOMC may prove necessary to keep the economy on an even footing.”

Westpac remediates credit card customers more than $11 million

ASIC says Westpac has provided around $11.3 million in remediation to around 3,400 credit card customers after ASIC raised concerns about its credit card limit increase practices.

In 2016, ASIC announced that Westpac had agreed to improve its lending practices when providing credit card limit increases to customers to ensure that reasonable inquiries are made about customers’ income and employment status (refer: 16-009MR).

As part of Westpac’s commitment, it reviewed credit limit increases previously provided to affected cardholders where they subsequently experienced financial difficulty. Following this review, Westpac provided remediation to around 3,400 customers, which included refunds of around $3 million for fees and interest, and around $8.3 million in credit card balances waived.

Westpac engaged an independent expert to provide assurance over the remediation program and has made the first two payments (of the $1 million total contribution) to support financial counselling and financial literacy, with further payments to follow in 2018 and 2019.


In 2014 ASIC conducted a review focussing on credit card providers’ invitations to customers to increase credit card limits. ASIC’s concerns with Westpac’s processes were identified through the course of this review.

The Government has introduced reforms into Parliament that will prohibit credit card providers from sending credit card limit increase invitations regardless of whether the consumer has provided their consent.

The Government’s reforms will also require credit card providers to assess whether a credit card limit might be unsuitable based on the consumer’s ability to repay the proposed credit limit within a period prescribed by ASIC, rather than the consumer’s ability to meet the minimum repayment.

Westpac Updates On Capital And Asset Quality

Westpac has released its December 2018 (1Q18) Pillar 3 update, which highlights a strong capital position, and overall benign risk of loss environment. They also provided some colour on Interest Only Loans.

They say that the Common equity Tier 1 (CET1) capital ratio 10.1% at 31 December 2017 down from 10.6% at September 2017. The 2H17 dividend (net of DRP) reduced the CET1 capital ratio by 70bps. Excluding the impact of the dividend, the CET1 ratio increased by around 20bps over the quarter.

Risk weighted assets (RWA) increased $6.1bn (up 1.5% from 30 September 2017) mainly in credit risk from changes to risk models and loan growth, partly offset by improved asset quality across the portfolio. Changes to risk models also contributed to an increase in the regulatory expected loss, which is a deduction to capital. Internationally comparable CET1 capital ratio was 15.7% at 31 December 2017, in the top quartile of banks globally.

Estimated net stable funding ratio (NSFR) was 110% and liquidity coverage ratio (LCR) was 116% which is well above regulatory minimums. They are well progressed on FY18 term funding, $15.4bn issued in the first four months. Westpac will seek to operate with a CET1 ratio of at least 10.5% in March and September under APRA’s existing capital framework and will revise its preferred range once APRA finalises its review of the capital adequacy framework.

The level of impaired assets were stable with no new large individual impaired loans over $10m in the quarter. Stressed assets to TCE 2bps lower at 1.03%. Australian mortgage delinquencies were flat at 0.67%. Australian unsecured delinquencies were flat at 1.66%.

The bulk of mortgage draw downs are in NSW and VIC, with an under representation in WA compared with the market.

90+ day delinquencies are significantly higher in WA, compared with other states, reflecting the end of the mining boom.

There is a rise in delinquencies for personal loans and auto-loans, compared with credit card debt.

Flow of interest only lending was 22% in 1Q18 (APRA requirement <30%). Investor lending growth using APRA definition was 5.1% and so comfortably below the 10% cap.

They provided some further information on the 30% cap.

The 30% interest only cap incorporates all new interest only loans including bridging facilities, construction loans and limit increases on existing loans.

The interest only cap excludes flows from line of credit products, switching between repayment types, such as interest only to P&I or from P&I to interest only and also excludes term extensions of interest only terms within product maximums. Product maximum term for Interest only is 5 years for owner occupied and 10 years for investor loans.

Any request to extend term beyond the product maximum is considered a new loan, and hence is included in the cap.

So does that mean I could get an P&I loan, then subsequently switch it to an IO loan, so avoid the cap?

Also they highlighted key changes in their interest only mortgage settings.

Note that investors are paying more than owner occupiers, and interest only borrowers are paying even more!

Westpac to Tighten Borrowing Terms

From Australian Broker.

Westpac will announce changes to its borrowing terms and conditions for local and foreign housing property buyers on partner visas next Monday, said a report.

The Australian Financial Review reported yesterday (30 January) that the changes will restrict appraisal of residential values, borrowers’ ability to repay, and eligible visas for housing loan applications.

The bank will tighten lending to holders of 309 and 820 partner visas, which allow the partner or spouse of an Australian citizen, permanent resident, or eligible New Zealand citizen to live in Australia. Borrowers on the partner visas will need an LVR of 80%, down from the current 90%.

On the other hand, the bank is relaxing its terms for borrowers relying on income from a second job. Instead of two years, borrowers need to have held a second job with the same employer for only one year, for their income to be acceptable. Borrowers and brokers are expected to welcome this, given the growing number of casual workers in Australia.

The report also said that Westpac is updating its household expenditure measure, which is used to assess borrowers’ ability to repay their loans. It did not specify what changes are being introduced.

Meanwhile, desktop valuations – which are based on computerised or photographic evidence – will be used only for a maximum LVR of 90%.

Greg Cook, senior credit advisor at mortgage brokerage firm Loan Market, welcomed these changes, saying that the banks are working to ensure that they have good credit policies in place for borrowers, in case there is a downturn.

“The more the banks look at their lending practices, the stronger our industry is. The more that they change their policies on a regular basis, the more valuable the mortgage broker is,” he said.

The new changes follow Westpac’s announcement last month that it would require home loan borrowers to disclose what they owe on short-term buy-now, pay-later loans on digital credit platforms like AfterPay and ZipPay. The move was part of the bank’s effort to bolster its assessment of borrowers’ loan serviceability.

The bank said then that borrowers with such loans have liabilities that must be captured in the loan application, along with the monthly repayment.

Westpac ditches “instant mortgage” plan

From Australian Broker.

Westpac has dropped its plan to offer “instant mortgages” as banks’ lending practices come under increased scrutiny.

The Australian Financial Review reported on 28 January that Westpac confirmed a plan to offer instant mortgages had been abandoned. The project had been active until as recently as late 2017.

The plan would have allowed Westpac to offer clients a nearly instant approval, or provisional approval.

Despite dropping the project, Westpac will continue to streamline its process for mortgage application and improve its turnaround times for housing borrowers, said the report.

The bank will go ahead with plans to extend innovations for its business clients and residential mortgage customers as it works to bolster its mortgage capabilities and protect its market share. These innovations include e-document signing and other technology-based solutions.

A Westpac spokesperson said the bank took its lending duties seriously and that it was always looking for ways to improve its mortgage lending experience for customers while complying with regulatory requirements, according to the report.

ASIC initiated civil proceedings against Westpac in March last year for its alleged failure between December 2011 and March 2015 to properly assess if borrowers could repay their housing loans.

The regulator said in its allegation that the bank relied on a benchmark to help it decide how much to lend to potential borrowers, instead of using actual expenses declared by borrowers.

Westpac has denied ASIC’s claim.

The Australian Financial Review said in its report that the bank was preparing for a courtroom fight with ASIC over this allegation.

Banks’ lending practices are expected to come under further scrutiny as the royal commission kicks off its investigation of misconduct in the banking, superannuation and financial services industry. The commission will hold an initial public hearing on 12 February.

Financial Advice Conflicts Still Exists In Vertically Integrated Firms

An Australian Securities and Investments Commission (ASIC) review of financial advice provided by the five biggest vertically integrated financial institutions has identified areas where improvements are needed to the management of conflicts of interest. 68% of clients’ funds were invested in in-house products.

This highlights the problems in vertically integrated firms, something which the Productivity Commission is also looking at.

The review looked at the products that ANZ, CBA, NAB, Westpac and AMP financial advice licensees were recommending and at the quality of the advice provided on in-house products.

The review was part of a broader set of regulatory reviews of the wealth management and financial advice businesses of the largest banking and financial services institutions as part of ASIC’s Wealth Management Project.

The review found that, overall, 79% of the financial products on the firms’ approved products lists (APL) were external products and 21% were internal or ‘in-house’ products. However, 68% of clients’ funds were invested in in-house products.

The split between internal and external product sales varied across different licensees and across different types of financial products. For example, it was more pronounced for platforms compared to direct investments. However, in most cases there was a clear weighting in the products recommended by advisers towards in-house products.

ASIC noted that vertical integration can provide economies of scale and other benefits to both the customer and the financial institution. Consumers might choose advice from large vertically integrated firms because they seek that firm’s products due to factors such as convenience and access, and recommendations of ‘in-house’ products may be appropriate. Nonetheless, conflicts of interest are inherent in vertically integrated firms, and these firms still need to properly manage conflicts of interest in their advisory arms and ensure good quality advice.

ASIC will consult with the financial advice industry (and other relevant groups) on a proposal to introduce more transparent public reporting on approved product lists, including where client funds are invested, for advice licensees that are part of a vertically integrated business. ASIC noted that any such requirement is likely to cover vertically integrated firms beyond those included in this review. The introduction of reporting requirements would improve transparency around management of the conflicts of interests that are inherent in these businesses.

ASIC also examined a sample of files to test whether advice to switch to in-house products satisfied the ‘best interests’ requirements. ASIC found that in 75% of the advice files reviewed the advisers did not demonstrate compliance with the duty to act in the best interests of their clients. Further, 10% of the advice reviewed was likely to leave the customer in a significantly worse financial position. ASIC will ensure that appropriate customer remediation takes place.

Acting ASIC Chair Peter Kell said that ASIC is already working with the major financial institutions to address the issues that have been identified in the report on quality of advice and management of conflicts of interest.

‘There is ongoing work focusing on remediation where advice-related failures have led to poor customer outcomes, and the results of this review will feed into that work,’ said Mr Kell.

ASIC is already working with the institutions to improve compliance and advice quality through action such as:

  • improvements to monitoring and supervision processes for financial advisers; and
  • improvements to adviser recruitment processes and checks.

ASIC will continue to ban advisers with serious compliance failings.

ASIC highlighted that the findings from this review should be carefully examined by other vertically integrated firms. ‘While this review focused on five major financial services firms, the lessons should be considered by all vertically integrated firms in the financial services sector.’

Download the report

Westpac Tightens Serviceability Requirements Again

From Australian Broker.

Consumers who use digital credit platforms like AfterPay and ZipPay will now have to disclose what they owe on these transactions if they apply for a home loan through Westpac.

Westpac announced in a broker note on 11 December that it would require borrowers to disclose these short-term buy-now, pay-later loans so the bank could better assess borrowers’ loan serviceability.

AfterPay and ZipPay allow customers to make and immediately receive goods and services purchased at a retail store or online without having to pay for it upfront. The digital credit companies pay on the customer’s behalf. The customer then has to make repayments, usually in installments over a short period of time with fees and charges incurred if they fail to do so.

“In the scenario above, the customer has created a liability which must be captured in the loan application along with the monthly repayment,” the Westpac note said.

“Where evidence is held to confirm the liability will be cleared in full before settlement or drawdown, a $1 repayment is acceptable to be entered against the liability.”

The bank said it expects detailed comments to be included in the application with evidence confirming the amount owing and the required repayments.

Banks are starting to zero in on borrowers’ spending habits and expenses, going above and beyond just looking into their credit and debit card charges.

In September, ANZ and CBA added extra checks to their application processes. ANZ’s updated customer questionnaire prompts brokers to ask prospective borrowers about their Netflix and Spotify subscriptions and whether they’re planning to start a family. CBA introduced a simulator to show interest-only borrowers how their repayments would change and affect their lifestyle. Customers wanting to proceed have to fill in an acknowledgement form.

Westpac refunds $11 million to interest-only customers

ASIC says Westpac will provide 13,000 owner-occupiers who have interest-only home loans with an interest refund, an interest rate discount, or both. The refunds amount to $11 million for 9,400 of those customers.

The remediation follows an error in Westpac’s systems which meant that these interest-only home loans were not automatically switched to principal and interest repayments at the end of the contracted interest-only period.

As a result, affected customers did not start paying any principal on their loans at the time agreed with the bank, and now have less time to repay the principal amount of their loans. These customers would also have paid more in interest.

To remediate the affected customers, Westpac will now:

  • Refund the additional interest paid from when the loan was contracted to convert to principal and interest repayments
  • Discount the interest rate for the remaining term of the loan.

This remediation has been designed so that customers pay no more interest over the life of the loan than they would have if the system error had not occurred.

ASIC will monitor Westpac’s consumer remediation program to ensure it is meeting consumer requirements.

ASIC Acting Chair Peter Kell said banks must ensure proper systems processes and oversight, particularly when it affected important assets such as consumers’ homes:

‘Greater regulatory scrutiny of interest-only loans has led to improvements in how lenders are providing these loans, including in lenders identifying system errors.’

‘All banks should be reviewing their systems to ensure that they minimise the chance of any such errors occurring, and that any risks to customers are identified early. If past errors are identified, remediation needs to be timely, transparent and effective.’

Westpac is contacting all affected customers, however customers with questions about their loan or the remediation can contact Westpac on 1300 132 925.

ASIC and Westpac are continuing to discuss an appropriate remediation program for investor customers with interest-only loans affected by the same system error.

This has been a long-standing error and has affected some interest-only home loans for owner occupiers who had an interest-only loan with Westpac between 1993 and August 2016.

More information about interest-only home loans 

Interest-only home loans have an initial agreed interest-only period, commonly up to five years. During the interest-only period consumers only pay the interest on the amount borrowed. At the end of the interest-only period the loan reverts to a principal and interest loan, to repay the loan over the remaining term. Repayments increase at the end of the interest-only period.

ASIC’s MoneySmart website has information for consumers about

interest-only mortgages as well as an interest-only mortgage calculator to help consumers work out their repayments before and after the interest-only period.

Additional background

ASIC is undertaking a targeted review of interest-only home loans and provided an update on this review in 17-341MR ASIC update on interest-only home loans.

ASIC is reviewing whether other major lenders have experienced a similar issue.

In 2015, ASIC reviewed interest-only loans provided by 11 lenders and issued REP 445 Review of interest-only home loans (refer: REP 445), which made a number of recommendations for lenders to comply with their responsible lending obligations (refer: 15-297MR).

In 2016, ASIC reviewed the practices of 11 large mortgage brokers and released REP 493 Review of interest-only home loans: Mortgage brokers’ inquiries into consumers’ requirements and objectives (refer: REP 493). REP 493 identified good practices as well as opportunities to improve brokers’ practices.

Will The Royal Commission Restore Trust, Certainty and Confidence in our Banking System?

That was the hope expressed during Westpac’s AGM held last Friday. It was interesting to hear from both Chairman and CEO on the upcoming Royal Commission.

Westpac chairman Lindsay Maxsted said

it is our hope that, ultimately, the newly announced royal commission will play a role in restoring trust, respect and confidence in Australia’s already strong financial system.

But, given the multiple inquiries which have run over recent months,  Westpac consistently argued that further inquiries into the sector, including a royal commission, were unwarranted.

He did concede that there had been some instances where the banking sector had failed to meet customer expectations and banks had underestimated the subsequent backlash from customers, regulators and the government.

CEO Brian Hartzer said

We are embracing the royal commission as a way to finally draw a line in the sand on calls for inquiries.

and asserted that the banks have “been a political football for too long”.

That’s why we have now accepted the need for a royal commission to create certainty and confidence in our banking system.

So, it is worth noting that the scope is still being wrangled, and the process will take at least a year. It is also has a broad set of terms, spanning not just the banks. Yes, the  announcement may ease the political debate, but that is not the end of the matter.

If past inquiries are any measure, there will be steady coverage as it progresses, and depending on the findings, it may, or may not rebuild confidence.

It seems to me that there can be no guarantees – and we still await the outcomes of the Productivity Commission on vertical integration, and ACCC on mortgage pricing.

So we think the outlook for the banks remains, at least, cloudy!



Westpac Cuts Mortgage Rates For New Borrowers

Westpac has announced a series of mortgage rate cuts to attract new borrowers, as it seeks to continue to grow its portfolio, leveraging lower funding costs, and the war chest it accumulated earlier in the year from back book repricing, following APRA’s tightening of underwriting standards and restrictions on interest only loans.

From Australian Broker.

Westpac and its subsidiaries have announced a number of rate cuts on select fixed rate mortgages for a limited time.

The changes will bring in lower rates on owner occupier and investor products and increase the introductory discounts on certain loans.

From last Friday (1 December), St George, Bank of Melbourne and BankSA have brought in the following rates for new lending:

Current Advantage package rate (p.a.) Change (p.a.) New promotional rate (p.a.)
2 year fixed owner occupier Principal & interest 3.85% -0.06% 3.79%
Interest only 4.24% -0.15% 4.09%
2 year fixed residential investment Principal & interest 3.99% -0.10% 3.89%
Interest only 4.49% -0.40% 4.09%
3 year fixed owner occupier Principal & interest 3.94% -0.05% 3.89%
Interest only 4.34% -0.15% 4.19%
3 year fixed residential investment Principal & interest 4.19% -0.20% 3.99%
Interest only 4.49% -0.30% 4.19%

Basic owner occupier principal & interest promotional rates have also been reduced across Westpac’s subsidiaries as follows:

Basic owner occupier P&I Old rate (p.a.) Change New rate (p.a.)
St George 3.78% -0.10% 3.68%
Bank of Melbourne 3.78% -0.14% 3.64%
BankSA 3.78% -0.14% 3.64%

Westpac itself also brought in a number of changes, effective from 4 December on new lending, by increasing the two-year intro discounts on its two and three year fixed option home and investment property loan rates.

Product Repayment Current rate (p.a.) Change Promotional rate (p.a.) Promotional comparison rate (p.a.)
2 year Fixed options home loan P&I 3.88% -0.09% 3.79% 4.86%
IO 4.39% -0.30% 4.09% 5.38%
Fixed rate investment property loan P&I 4.19% -0.30% 3.89% 5.31%
IO 4.59% -0.50% 4.09% 5.75%
3 year Fixed options home loan P&I 3.99% -0.10% 3.89% 4.82%
IO 4.49% -0.30% 4.19% 5.32%
Fixed rate investment property loan P&I 4.24% -0.25% 3.99% 5.23%
IO 4.59% -0.40% 4.19% 5.64%

The bank has also increased the two-year offer discount on its flexi first option home for principal and interest repayments from 0.84% p.a. to 1.00% p.a. putting the current two-year introductory rate at 3.59% p.a.

A Westpac spokesperson said the bank was pleased to launch these competitive rates for new lending across the group to support Australians purchasing a new home in a responsible manner.

“We know many Australians begin thinking about purchasing a new home as the year draws to a close and they look ahead to the new year and a fresh start.”